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1、厦门大学管理学院博士研究生课程报告八,高级投资项目管理和经济效益评价 理论、方法和实践 厦门大学管理学院 吴世农 Advanced Capital Budgeting Theory, Methods & Applications Wu Shinong School of Management Xiamen University,Advanced Topics in Capital Budgeting,I. What is Capital Budgeting? Capital=Fixed Assets used in production/service; Budgeting=Plan deta
2、iling projected cash inflows and outflows during some future period, thus “Capital Budgeting” outlines the planned expenditures on fixed assets. 1. Multi-concepts for Capital Budgeting (1) Capital Investment Analysis & Decision (2) Economic Evaluation of Investment Projects (3) Technological Economi
3、cs (4) Investment Feasibility Study 2. A Formal Definition of Capital Budgeting Capital budgeting is a filed of finance concerned with cost and benefit, and return and risk derived from investment project undertaken by a firm. The capital budgeting is a procedure include a set of systematic techniqu
4、es dealing with how to evaluate and select investment projects under certainty or uncertainty.,厦门大学管理学院吴世农,Market Research Investment Sources & Cost CBA Expenditures of Capitals Marketing Strategy Costs & Income R Profits Statement Risk & Investment Analysis D Management Assets & Balance Liabilities
5、 Sheet Production Finance Cash Inflow & Cashflow Repayment Opportunity Study Cash Outflow Statement Analysis Preliminary Discussion Feasibility Discussion Final Proposals Study Report Exhibit 1: Diagram Suggested for Investment Projects Feasibility Study in Firms,厦门大学管理学院吴世农,Technological Macroecono
6、mic Feasibility Feasibility Financial Implementation Operation Feasibility Social/Cultural Environmental Feasibility Feasibility Comprehensive Review Post- Feasibility Report Assessment Exhibit 1 (Continuos): Diagram Suggested for Investment Projects Feasibility Study in Firms,Advanced Topics in Cap
7、ital Budgeting,II. Conflicts between NPV and IRR for Mutually Exclusive Projects 1. Size Effect of Investment Outlay on NPV and IRR (1) ConflictWhich Maximizes Shareholders Wealth? Suppose that there are two projects, A and B, n=1, K=10%, their investment outlays and NCF are presented in the followi
8、ng table. Project I0 NCF1 NPV (k=10%) IRR PVI A 5,000 8,000 2,273 60% 45.46% B 50,000 75,000 18,182 50% 36.36% Both projects are acceptable due to their positive values of NPV, however, given that the two projects are mutually exclusive, which one is preferred? Also, because the size of investment o
9、utlays for A and B are different. By NPV, A is better than B; by IRR (or PVI) B is over A. This case is typical as a conflict raised from decision criteria by NPV or by IRR?,厦门大学吴世农,(2) Solution Since K=10% is assumed to be fixed, we can solve this conflict by creating a differential project (B-A),
10、if the differential project yields a positive NPV, it is obvious that B is better than A because not only a part of B will create a NPV equal to NPVA, but also create a positive NPV for the differential project (B-A). Thus, we create a differential project (B-A), and then calculate its NPV and IRR N
11、PV(B-A) = (75000-8000)/(1+10%)-(50000-5000)=$15909 (75000-8000)/(1+IRR(B-A) )=(50000-5000), IRR(B-A) =48.8% No doubt, the results above suggests that the investors of the firm will be better off if project B is accepted.,Advanced Topics in Capital Budgeting,2. Trend Effect of NCF on NPV and IRR (1)
12、ConflictWhich One is a Sounding Decision Rule? Suppose there are two mutually exclusive projects, A and B, the following graphs show that the trend of As NCFs and the trend of Bs NCFs are different. Obviously, graph 1 states that As NCFs are always larger than Bs NCFs over the periods, thus, NPVANPV
13、B; graph 2 states for the earlier periods As NCFs are larger than Bs NCFs, thus NPVA NPVB, but for the later periods (after K*) As NCFs are smaller than Bs NCFs, thus NPVANPV B B A NPVA NPV B NPVA =NPV B K NPVA NPV B K k IRRB IRRA k* IRRAIRRB,厦门大学吴世农,For graph 1, project A will be chosen for investm
14、ent while project be will be given up. The decision is clear. For graph 2, it is hard to say which one is better. The question can not be answered until we do a further study. (2) Solution To illustrate the case shown in graph 2, the following table contains necessary information for making the accept/reject decision. Project I0 NCF1 NCF2 NPV(K=10%) IRR NPV(K=20%) A 1000 1000
